UK: Brexit: Dead ... Ahead?

"Brexit" – the United Kingdom's
("UK") 2016 voter referendum to exit the European Union
("EU") has grown from a nagging itch in many people's
sides to a full-blown feeding frenzy. There is now virtually
blow-by-blow news coverage of daily developments. Pundits issue
editorial warnings of dire economic consequences ahead
(particularly for the UK). Savage political cartoons and even
"You Tube" videos of UK and EU leaders prancing and
dancing to the beat of Mama Mia are every day fodder.

Until recently UK media focus often featured the rising and
falling pastry dough on "The Great British Baking Show"
and the gentle, sure-handed guiding touch of show presenter, Mary
Berry. Now, Mary Berry and her baking cohorts have been eclipsed in
the media by the dower, dogged image of UK Prime Minister Theresa
May, the public face of the Brexit drama, who is widely viewed as
presiding over "The Great Brexit
Breakdown."1

The coming Brexit breakdown seems evokes a new version of the
old familiar refrain "water, water everywhere and not a drop
to drink." Today, the song might go "Brexit Brexit's
everywhere and no one stops to think." Brexit's coming
– dead ahead.

This is the seventh in an ongoing series of blog posts by Foley
& Lardner LLP on the implications of Brexit.2 UK
exit from the EU is currently poised to become effective on March
29, 2019.3 A tentative agreement avoiding Brexit was
hammered out in late 2018 after months of the tortious negotiations
between UK and the EU27. However, UK final approval is by no means
certain as bitter political infighting continues.4 The
negative consequences of Brexit continue to intensify as the clock
ticks toward March 2019.

Despite almost unanimous calls for resolution of the Brexit
question and for urgently needed economic and regulatory
clarity,5 bitter infighting in the UK among proponents
of "hard," "soft" or "no" Brexit have
consumed valuable time, energy and political capital. Even in the
face of this fast approaching deadline, overwhelming opposition in
Parliament to the deal has caused Prime Minister May to postpone a
vote on the negotiated UK/EU27 withdrawal deal until mid-January
2019.6 Perhaps, not surprisingly, calls for
"no" Brexit through another voter referendum have
increased.7 Support for 'no" Brexit" has
arrived from an unexpected direction – the EU's highest
court. In December 2018, the European Court of Justice (an
arch-villain of "Brexiters" who have railed against UK
loss of sovereignty in the EU) ruled that the UK could unilaterally
withdraw its decision to exit if it chose.8 While this
judicial green light has emboldened advocates a second referendum
that might reverse the exit decision, time is running out and it is
increasingly likely that the UK will crash hard out of the EU and
face unpalatable uncertainties that are sure to weaken its economy
and disadvantage its industries.

This "hard exit" out of the EU by the UK and a
presumable hard landing were graphically depicted by a cartoon
recently posted on Reddit.com:

Where that UK bus careening out of the EU will land is "up
in the air."

From the outset since the Brexit vote went down in 2016, it has
been undisputed that the UK industry, which is economically linked
to and integrated with the EU, will likely, be increasingly
vulnerable after Brexit.9 Warnings of dire consequences
voiced in 2016 are reiterated today – reduced
competitiveness, increased costs, currency risks, inefficiency,
increased unemployment, brain drain and capital
flight.10 According to Carolyn Fairbairn, CBI
Director-General, money has been and is flooding out of UK
businesses, damaging productivity and the wider
economy."11

Sadly, the scene in the UK has not changed much since the 2017
notice to exit was issued, despite pressure of the Brexit clock.
Once again in early 2019 as in 2017, the situation in the UK is
aptly depicted in a 2017 cartoon appearing The
Economist under the caption: "Brexit Talks –
The Current State of Play." The cartoon features a tennis
court. On one side is a tall, athletic EU player serving at
"advantage." On the other (UK) side of the net, the court
is further divided by yet another net running perpendicular to that
net, dividing the UK side of the court into two halves. In each UK
half, two clearly less-gifted UK players (labeled respectively
"soft" and "hard") are hitting errant balls at
each other (instead of contesting with the EU) and shouting
complaints about each other to Teresa May who is depicted sitting
on the sidelines, labeling both "hard" and
"soft" as at "fault." In the background and as
a reminder of the clicking Brexit two-year clock, there is the
game's umpire who seeks to have the EU and the UK sides resume
playing with the not-so-gentle reminder to the UK side –
"time."

Unfortunately, despite the 24/7 news coverage, the YouTube
videos and the savage cartoon caricatures, it has apparently not
sunk-in on UK decision makers that Brexit is not a game of tennis
played on a grass court by white-clad, upper-class gentlemen and
ladies. The consequences of a no-deal hard exit are real and are
fast approaching. Indeed, the horizon looks rather bleak.

Again, as has been widely recounted, the UK and the EU have been
economically closely integrated for decades, particularly since the
UK joined the EU in 1974. Transportation systems, communication
networks, EU-wide enterprises operate within the EU system on the
basis of the free movement of goods, services, capital and people.
While by no means perfect, the system functioned based on EU-wide
common rules and seamless borders. The overall EU economy and the
UK economy, in particular, benefitted greatly from the unified
system. That will change dramatically for the UK as a hard-exit
will put at risk a raft of services – financial, electrical,
agricultural, infrastructure funding, telecommunication – as
well as the rights of EU member citizens living in the UK as well
as UK citizens living in the EU. In a word, movement whether of
goods, services, capital and/or people will no longer be free, easy
or seamless.12

Predictions of the potential difficulties for the UK when it
exits the EU are numerous and easy to find.13 For
example, the CBI predicts that trade between the UK and the EU 27
will immediately face increased tariffs (+/- 5%, depending on the
direction of the trade). Logistical log-jams at the ports and on
the previously seamless highways (whether air, water or motorways)
are widely predicted. EU financial services and the likely end of
banking "passport" rights will increase costs, risks and
inconvenience. Food, medicine and manufacturing inputs for UK'
previously EU-wide integrated industries will be seriously
disrupted. Overall, the UK GDP is

expected to fall by 5% over the near term. While the UK would
seem to suffer more than the EU27, it too will feel the impact of
Brexit.14

What that post-Brexit world will look like particularly for the
UK remains, of course, unclear at this point.15 Assuming
a hard, no-deal Brexit, it seems likely that the UK on exiting the
EU may, at least in the short-term, fall back on its rights and
obligations as a member of the WTO. While the WTO platform provides
a general, recognizable and enforceable set of rules on issues like
tariffs on goods, trade procedures, standards, etc., reliance on
WTO membership will prove no easy substitute for and may well be a
clear step down from the free trade benefits which the UK had
enjoyed as a member of the EU. Suffice to say, it poses many
complex questions that will have to be addressed.

In that event, the UK faces a daunting maze in the coming days,
as the Yorkshire Post graphically depicted in a recent editorial
cartoon.

Among the most cited alternatives include UK membership in the
European Economic Area ("EEA"),16 the European
Free Trade Association ("EFTA")17 and a free
trade customs union that the EU has with a number of
countries.18 However, all of these alternatives have
major negatives for the UK. All of these alternatives substitute
membership in a seamless EU market for other interests –
greater sovereignty and enhanced control over immigration. However,
they all come at a potentially significant price that must be
weighed against the value of the perceived Brexit rationale and
Brexit's justification. Indeed, in balancing such competing
interests, some might even consider membership in the EEA, EFTA or
a free trade customs union with the EU to represent a significant
step backwards for the UK and for the EU as well.

Whatever the outcome, the UK will likely require a long time to
recover from the serious, negative ramification flowing from
Brexit. There's water, water everywhere but not a drop to
drink. There's Brexit, Brexit everywhere but it's time
people stop and think.

2 Prior Foley Brexit blogs have reviewed: 1)
developments leading up to the Brexit vote, likely competition law
as well as procedural implications; 2) risks/uncertainties for
standardization and innovation; 3) possible legal alternative
outcomes posed by Brexit – a hard landing, a soft landing or
never-never land; 4) wheeling and dealing to shore up political and
economic support; and 5) the commencement of the formal divorce
proceedings and 6) the intense infighting among conservatives about
the Brexit decision, process and outcome. Links to the prior six
Brexit articles posted on the Foley & Lardner Automotive Blog
are as follows:

3 As has been clear throughout this Brexit
push toward exit, deadlines, however fixed in law or stone,
sometimes are at the last moment flexible as the process plays out
in real time and real life.

4 "EU say no to May on renegotiating
deal," BBC.com (December 14, 2018). Perhaps, a
"nip or a tuck" here or there, but the EU has no stomach
for further accommodations to the UK.

5 John Allen, President of the Confederation
of British Industry ("CBI"), said in an address to his
CBI colleagues that a no-deal Brexit would be "a nightmare
scenario ... which would be a wrecking ball for our economy."
CNBC, (November 18, 2018).

6 Ironically, the most vocal opponents of the
deal are hard-core Brexiters who are members of May's own
Conservative party.

7 See "A Second Brexit Referendum was
once a pipe dream. Now some wonder if it's the only way out of
the chaos." The Washington Post (December 15,
2018).

8 A group of Scottish pro-Europe petitioners
(including the "Good Law Project") had brought an action
to seek a ruling whether the UK could change its mind about Brexit.
The Scottish Court of Sessions ruled that it could on September 17,
2018. On a referral to the European Court of Justice
("ECJ") to determine whether, under EU law, the UK could
unilaterally halt the Brexit process, the ECJ ruled on December 10,
2018 that the UK could revoke its withdrawal from the EU as long as
the withdrawal agreement between the UK and the EU had not been
formally executed and the two-year Article 50 notice period had not
run. EU Court Press Service (December 10,
2018).

9 Of course, these industry concerns are not
new. See "Toyota Demands Clarity over Brexit," The
New York Times (October 25, 2017); "Tied to Europe,
British Car Industry is Vulnerable after Brexit," The New
York Times (December 6, 2016).

10 In 2016, one senior union spokesperson
stated about the future prospects of his plant after Brexit,
"it is absolutely suicidal." See The New York
Times (Ibid at 2).

11 CNBC report on November 19,
2018.

12 As is well understood, there are, however,
a significant number of EU-generated rules and regulations that
have been adopted by the UK and will remain in place. Still, there
will be substantial uncertainty. Moreover, the UK borders with the
EU have never been totally seamless as the UK never was a party to
the 1995 Schengen agreement.

13 There have been many studies starting even
before the 2016 UK referendum. See, e.g., The Institute for
Government "Understanding the Economic Impact of Brexit"
(October 19, 2018); OECD, "The Economic Consequences of
Brexit: A Taxing Decision" (April 2016); Financial Times,
"What are the Economic Consequences of Brexit So Far?"
(June 23, 2018).

14 See "Free falling," The Economist
(November 24, 2018). This article on a no-deal Brexit provides a
comprehensive look into the rabbit hole as the UK is pushed ever
closer to jumping into the oblivion.

15 See, "May's Brexit Deal is Likely
to Fail. What Happens Then?" New York Times (December 11,
2018)

16 Lord David Owen most recently urged serious
consideration of this idea in an op-ed piece in the November 2,
2018 Sunday Times of London. His article is entitled
"If May loses in the Commons, we have one card left: the
EEA." Current members of the EEA are Norway, Iceland and
Lichtenstein. As has been underscored before, however, UK
membership in the EEA does little to achieve the goals of Brexit
(assuming current EEA members would approve). The EEA requires that
EEA members observe all of those EU four freedoms (including free
movement of people), make financial contribution to the EU budget
and compliance with many EU rules and regulations.

17 Switzerland is an EFTA member. However,
EFTA members do not have the same seamless free trade in services
that the UK enjoys today within the EU which could prove a major
negative for the UK banking industry. EFTA members are, as well,
subject to the jurisdiction of the EFTA court would conflict with
the clear goal of Brexit supporters who sought to avoid
surrendering UK sovereignty to the European Court of
Justice.

18 The EU has free trade customs union
agreements with, for example, Morocco, Tunisia, Israel, Turkey,
etc. However, such an agreement may complicate trade agreements
with other trading partners.

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The threat of a no-deal Brexit is creeping ever closer with no obvious plan B visible from Theresa May and her Brexit team, it comes as no surprise that the risk that there may be shortages of vital medicines and other supplies is now looming.

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